Why Unemployment And The Duration Of Unemployment Remains High In The U.S.

by: Disruptive Investor

The regional state employment and unemployment report for July 2011 was summarized by the BLS as:

Regional and state unemployment rates were generally little changed in July. Twenty-eight states and the District of Columbia registered unemployment rate increases, nine states recorded rate decreases, and thirteen states had no rate change, the U.S. Bureau of Labor Statistics reported today. Thirty-seven states posted unemployment rate decreases from a year earlier, seven states and the District of Columbia reported increases, and six states had no change. The national jobless rate was little changed at 9.1 percent but was 0.4 percentage point lower than a year earlier.

My key concerns in this data and the preceding ones are:

1) Why the unemployment rate remains at higher levels.

2) Will unemployment remain high in the next few years?

3) The high unemployment duration and its impact on government finances, consumers and the overall economy.

Discussed below are my conclusions, which make me believe that the unemployment rate will remain high for the next few years. Furthermore, in my opinion, the high duration of unemployment is most likely to depress consumer sentiment negatively in the foreseeable future.

In order to understand the reason for the high unemployment rate, one needs to look at sectors which contributed to the increase in jobless rates.

There are two key things this data will tell us –

1) Are the sectors which lead to the most job losses in a phase of recovery or stability?

2) Are unemployed resources from these sectors fit for employment in other sectors where job creation might be relatively high?

As the chart below shows, about 50% of the job losses during the period December 2007 to February 2011 have been in the construction and manufacturing sector. During the same period, more than 90% of new job vacancies were in other industries.

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Source: St. Louis Fed

Clearly, if job losses are related to relatively low wage construction and manufacturing workers, they might not be the best fit for jobs in other sectors.

Furthermore, there has been no improvement in the housing or construction market to provide any hopes of job creation in the respective sectors.

Coupled with these facts, the manufacturing sector has not been creating jobs since the year 2000. The same is evident from the chart below, which gives the evolution of sectoral employment in the last decade.

Evolution of Sectoral Employment
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Source: Annual Report (St. Louis Fed)

The key issue here is: If an economy were to grow in a “Balanced Growth Path”, job evolution in all the sectors shown in the chart would fluctuate around the normalized value of 100.

Unfortunately, this has not happened for the manufacturing sector since the year 2000 and for the construction and mining sector (more recently).

It is only the education and health services sector that has witnessed increased job creation. A large part of job creation in this sector has been aided by government recruitment.

However, as mentioned above, a balanced economic growth should not have only one sector booming while others are lagging behind.

What I want to stress here is that the construction and manufacturing sector needs a boost for job creation to happen. Furthermore, construction does not only mean housing construction, which is bound to remain weak in the foreseeable future. Construction would broadly encapsulate the entire infrastructure sector.

However, I don’t see government policies and actions directed towards boosting manufacturing and construction. Therefore, job creation in these sectors seems unlikely in the near-term.

Closely related to consumption and consumer sentiment is the duration of unemployment. As the chart below shows, the duration of unemployment is at record high levels.

Duration of unemployment
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Due to this, there are several negative implications for the economy –

1) With people remaining unemployed for longer durations, there is a general perception of nervousness and fear among consumers. Therefore, the consumer sentiment would remain depressed.

2) Furthermore, the high level of unemployment has its negative impact on government finances. This might add significantly to the debt burden in the long-term.

In conclusion, the QE packages have bailed out banks and financial institutions, but failed to have a significant impact on job creation. Moreover, with no clarity on several policy actions (including taxes), the government makes it difficult for the private sector to create a roadmap for growth and expansion (which would lead to job creation).

Considering all these factors, one can conclude that the unemployment rate will remain at higher levels in the foreseeable future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.